SEC Form 8-K Disclosure Rules for Executive and Director Compensation Poerio.Indd

To maintain momentum ›› StayCurrent. December 2004

SEC Form 8-K Disclosure Rules For Executive and Director Compensation

By Robert R. Carlson, Eric R. Keller, J. Mark Poerio, and Michael L. Zuppone

On November 23, 2004, the staff of the SEC’s In its FAQs, the SEC staff states that the pur- Division of Corporation Finance issued answers pose of the Form 8-K revisions was “to increase to frequently asked questions (“FAQs”) concern- the number of unquestionably or presumptively ing the implementation and interpretation of its material events that must be disclosed currently, recently adopted revisions to its Form 8-K dis- in accordance with the goals of Section 409 of closure rules.1 The new Form 8-K requirements the Sarbanes-Oxley Act of 2002” (“SOX”). The accelerate the due dates for required filings, and SEC is also urging registrants to “assure that they significantly expand the items that trigger filings. have implemented appropriate disclosure controls and procedures . . . to ensure that information The FAQs, provide interpretive guidance, among required to be disclosed by Form 8-K is brought other things, on the new requirements as they to the attention of management and disclosed relate to executive and director compensation, within the timeframes contemplated by Form employment agreements and termination from 8-K.”2 service. As indicated in the tables below, the SEC staff has taken a broad interpretation of the term “material definitive agreement.”

Disclosure Required Under FAQs for 8-K Rules Item Events Triggering 8-K Disclosure and 8-K Disclosure That is Required

Director Compensation3 1. A written summary sheet that sets forth “an agreement between the registrant and the director” as to meeting fees or other compensation. An agreement could be a written or a verbal understanding or arrange- ment with a director.

2. A written description of any compensatory plan or contract that is not set forth in a formal document. Employment Agreements Any new or amended employment agreement with –

1. a named executive officer (“NEO”) or director.

2. an executive officer other than an NEO unless it is “immaterial in amount or significance” or is not required to be disclosed under Item 601(b)(10)(iii) of Regulation S-K.4

Any written notice to terminate an employment agreement or to avoid an automatic renewal, even if the par- ties believe in good faith that they will negotiate a new agreement or renew the existing one.5

Entry into a separation agreement with a NEO. Item Events Triggering 8-K Disclosure and 8-K Disclosure That is Required

Equity Compensation6 1. Adoption of a new plan in which NEOs or directors are eligible to participate, at the time of Board approval if the plan is not subject to shareholder approval.

2. Adoption is deemed to occur on the date on which shareholder approval occurs, for a plan or awards that are subject to such approval. Grants under Equity Plans7 Individual award agreements with directors and NEOs that are “materially different” from a form already filed with the SEC. Cash Bonus Plans8 Any new or amended cash bonus plan with – 1. a NEO or director. 2. an executive officer other than an NEO unless it is “immaterial in amount or significance” or is not required to be disclosed under Item 601(b)(10)(iii) of Regulation S-K.

Board approval of specific performance goals for a previously-approved plan. The performance measures and business criteria must be disclosed, but target levels and confidential commercial or business information are not required to be disclosed.

Pay-outs under cash bonus plans that are discretionary or have not been previously disclosed as performance- based plans.

Payments under performance-based plans if the amount paid is greater than the formula amount. Termination from Service A “notice of a decision to resign, retire, or refuse to stand for re-election provided by a director or executive officer.”9 Note that the disclosure must specify the effec- tive date of the resignation or retirement.

NO Disclosure Required Under FAQs for 8-K Rules

Item 8-K Disclosure That is NOT Required

Director Compensation10 Internal proposals, including written summary sheets, the Board does not approve or establish as an agreement with directors. Employment Agreements11 Any new or amended employment agreement with an executive officer other than an NEO if the agreement is “immaterial in amount or significance.”

Automatic renewal in accordance with the agreement’s terms, provided renewal does not require written notice.12

Termination of an employment agreement in accordance with its terms.13 Equity Compensation14 Adoption of a new plan that is subject to shareholder approval (provided that the disclosure is made at the time of the shareholder approval). Grants under Equity Plans15 Individual award agreements that do not differ materially from a form already filed with the SEC. Cash Bonus Plans16 Pay-outs that occur under performance-based plans provided that the registrant – (i) made proper prior disclosure of the plan, and (ii) has not exercised discretion to pay bonuses greater than the formula amount. Termination from Service Discussions or consideration of a decision to resign, retire, or refuse to stand for re-election provided by a director or executive officer.17

02 Strategies for Compliance: In conclusion, we recommend that registrants review, and revise as warranted, their disclosure controls The FAQs should remove any doubt that the SEC has and procedures to ensure that they are positioned to dramatically expanded the circumstances under which meet the expanded Form 8-K disclosure requirements registrants are required to disclose executive and direc- with respect to director and executive compensation, tor compensation information on Form 8-K. Notably, employment agreements and termination from service. to be compliant, registrants need not make 8-K filings for every individual award or change in director or Contact Information: For further information, please executive compensation. contact the following members of the firm’s Securities Practice Group and Executive Compensation Practice To avoid the need to file a Form 8-K to disclose indi- Group. vidual awards every time they are made, registrants should publicly file each of the forms of awards Robert R. Carlson (213) 683.6220 to be used under the particular plan or program. Registrants may file these forms as exhibits to a Form [email protected] S-8 registration statement, a Form 10-Q or 10-K, or a separate 8-K current report.18 Eric R. Keller (202) 508.9524 [email protected] In addition, registrants could avoid a separate Form 8-K filing if the triggering compensatory decision is J. Mark Poerio (202) 508.9582 made within four days of the filing of Form 10-Q or [email protected] Form 10-K periodic report. The SEC staff clarified that registrants can satisfy their Form 8-K disclosure Michael L. Zuppone (212) 318.6906 obligations by including the required information in such periodic reports provided that they are filed [email protected] before the due date of the Form 8-K.19

Notes:

1. For a summary of the SEC’s Form 8-K disclosure rules, feel 8. FAQs 12 to 14. welcome to contact us for copy of our June 2004 Client Alert titled 9. FAQ 24 “Overview of the SEC’s New 8-K Disclosure Rules” by Elizabeth A. 10. FAQ 5. Brower and Michael L. Zuppone. 11. FAQs 6 and 7. 2. Page 1, “Note,” to the SEC’s FAQs issued November 23, 2004. 12. FAQ16 3. FAQ 5. 13. FAQ 17. 4. FAQs 6 and 7. The registrant must also file a disclosure under 14. FAQ 8. Item 5.02(c) of Form 8-K if the officer is newly appointed to one of 15. FAQs 9 and 10. the positions specified in that Item. Id. 16. FAQs 12 to 14. 5. FAQ 15. 17. FAQ 24. 6. FAQ 8. 18. FAQ 11. 7. FAQs 9 and 10. 19. FAQ 1.

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